(Adds additional El-Erian comments)
NEW YORK, Feb 17 (Reuters) - Mohamed El-Erian, chief economic adviser at Allianz SE, said Tuesday that Ukraine and Greece are major market risks, but that the biggest risk is the "illusion of liquidity."
"The biggest risk is this illusion of liquidity," El-Erian told cable television network CNBC. "The major concern is that you get a change in the paradigm, and then people discover that there isn't enough liquidity to reposition."
El-Erian said that the lack of liquidity could result in a market selloff, although he said such a scenario was not his "baseline."
"If people no longer believe that we are in a low-volatility, improving U.S. economy, geopolitical shocks become too big. If all that changes, then you're looking at at least a 10 percent correction, and at that point, there is going to be a question of what holds."
Curbs on banks' ability to take risks and an increase in technology-driven trading have resulted in dramatic upswings in volatility that have put post-crisis financial markets to the test in recent months.
A selloff in stocks and lower-rated bonds last October was worsened by a lack of banks and market-makers able to step in and buy assets that were being dumped.
El-Erian also said that, while the risks surrounding Greece's finances and continued conflict in Ukraine were significant, a Greek exit from the euro zone would not be cataclysmic for the global economy, though it would create "short-term chaos." (Reporting by Sam Forgione; Editing by Alden Bentley and Nick Zieminski)